UT Report to the Governor: Economy to See Stronger Growth in 2014 and 2015

After five years of sluggish recovery, the US and Tennessee economies are poised for strong growth in 2014 and 2015.

Despite the slow pace of the recovery, many indicators—including an increase in consumer confidence, rallying stock market prices, and rising home prices—point to brighter growth prospects in the quarters ahead, according to the forecast in the 2014 Economic Report to the Governor of the State of Tennessee, released today.

The study, prepared by UT’s Center for Business and Economic Research, predicts the course of the state and national economies by examining many fiscal factors and trends.

Household net worth grew by almost 10 percent in 2013, surpassing its pre-recession level for the first time.

“As a result, consumers spent more and firms were more eager to hire,” said Matt Murray, CBER associate director and the report’s author.

The economy added about 2.2 million jobs in 2013. The unemployment rate also fell by more than a full percentage point over the course of the year, down to 6.7 percent in December 2013—the lowest it has been since late 2008.

The rebound of the housing sector that began in 2012 continued into 2013. Housing starts increased by 19 percent from 2012 to 2013. Rising home prices from 2012 also continued into 2013.

“Despite its solid performance, the housing sector still has a long way to go to recover fully,” Murray said. “Sales of new houses are still less than one-half their pre-crisis figures.”

The slow global recovery, especially in Europe, continues to hold back US exports. However, for the third straight year, exports have grown slightly faster than imports, according to the report. The positive outlook for the global economy in the future also will help boost US exports and growth.

The inflation-adjusted gross domestic product is projected to grow by 2.7 percent in 2014, followed by a 3.2 percent and 3.4 percent growth in 2015 and 2016 respectively.

“Although many remain cautious regarding the sustainability of the recovery, most observers agree the US economy is now in much better shape than it was a few years ago and faces brighter prospects in the coming quarters,” Murray said.

Tennessee Economy

Tennessee’s economy improved from 2012 to 2013, according to the report.

Nonfarm employment increased by 1.5 percent, representing an addition of more than 40,000 jobs to the state economy. Despite the job growth, the annual unemployment rate increased slightly, from 8.0 percent in 2012 to 8.2 percent in 2013.

The report also finds that:

Tennessee’s unemployment rate will fall to 7.5 percent in 2014 and 7.0 percent in 2015. This will mark the first time since 2008 that unemployment drops below 8.0 percent. However, it is still well above pre-recession levels.

Nonfarm employment is expected to increase by 1.5 percent in 2014 followed by 1.8 percent growth in 2015.

Leisure and hospitality, professional and business services, and transportation equipment will experience the largest rates of job growth in 2014 and 2015.

Personal income was up 2.7 percent last year, slightly behind the pace of income growth for the nation. It is projected to rise by 4.2 percent this year followed by 4.5 percent in 2015.

Taxable sales increased at a rate of 2.8 percent in 2013. They are projected to increase by 3.4 percent this year and 3.8 percent in 2015.

The state’s housing and labor markets have been slow to heal. Recovery in the housing sector will continue this year. However, the labor market is likely to continue to struggle for the remainder of the decade.

State Revenue Performance

Tennessee tax revenues continue to grow, but at a slower rate than the Southeast region as a whole. Total tax revenues grew by 3.3 percent in fiscal year 2013, while sales tax collections were up only 1.8 percent. Both revenue categories grew more slowly than in the majority of other states in the region.

Sales and use tax collections were up 2.5 percent from December of last year. Business tax collections were 20.5 percent above last December, while inheritance and estate collections were up 67.5 percent and gasoline tax collections expanded by 16.8 percent.